Functional Definitions:
FD1: Say you own shares of a stock, and you plan to sell those shares at a specific time in the future. You don't want to lose money when you sell them. You think that maybe the stock is going to decline by the time you want to sell it. So, you find and investor who will sign a contract to purchase those shares at your chosen time of sale and at the rate that they are at the time of signing (a put option), for a fee of course. Now, when the time comes for you to sell and the stock has declined, you can still sell those shares to the investor (put option signer)for the same rate that they were at time of signing. The flexibility of a put option lies in that, if the stock increases, you don't have to sell, only causing you to lose the monies paid for the fee of the put option.
FD2: If you don't own shares of a particular stock, you can purchase a put option on it as well! Buying a put option on shares that you don't own, allows you to do just the same, find an investor who will sign a contract to purchase these particular shares from you at your chosen time of sale and at the rate that they are at time of signing. However, this practice is pretty much a betting game and a gamble. Allow me to explain, If you are purchasing put options for shares that you don't even own, then you are pretty much speculating, hoping and praying for that stock to decline at a specific time. So when it does decline, you can go to the market, buy up that declined stock, and sell it to the investor (put option signer) that has contractually agreed to buy them at the higher price they were before declination!In the stock exchange market, the average ratio of put options to call options (an opposite trading option) is roughly about 1:1 on particular days and only slightly higher on others. When there is a wild discrepancy in that ratio it is typically an indication that the buyer of these options has a reason to believe the particular company is about to have a serious change of fortune. This is known as Insider Trading, the trading of a companies' stocks, bonds, options and what not by individuals with access to non-public information about the company. Potentially, you could use non-public information to make monumental gains in the market, as well as avoid losses, if it were legal to do so. Yes this act is considered illegal! So when the put:call ratio of a company spikes suddenly the U.S. Securities and Exchange Commission is alerted, and an investigation soon follows.
To Be Continued..............
